II. Marco teórico y conceptual
II.I Teoría de la Democracia
Collections and History
Fiscal year 2013 net collections from the individual income tax were $9.0 billion. All revenue from this tax goes into the State General Fund.
The State of Minnesota enacted an income tax for individuals and corporations in 1933. The same graduated rate schedule applied to both taxes, and it was divided into $1,000 increments, with the lowest rate at 1% on the first $1,000 of taxable income and the highest rate at 5% on taxable income over $10,000.
Although many changes were made to the individual income tax over the years, the structure of the tax remained basically the same from 1933 through 1984. In 1985 major changes were made in two areas: the joint income of married couples and the deductibility of the federal income tax.
Prior to 1985, one rate schedule applied to all filers, so that the income of each person was treated the same, regardless of marital status. Two-income married couples usually filed separately, even though they filed a joint federal return. In 1985 a married-joint tax rate schedule was added, and the election to file jointly or separately was required to be the same as on the federal return. Other provisions were changed so that they were based on the joint income of the couple rather than on the income of each taxpayer. A deduction for federal income taxes was allowed until 1985, when the deduction was made an option, with a schedule of higher tax rates used if federal tax was deducted. In 1987 the deduction for federal income tax was eliminated as part of another wave of broad changes to the individual income tax.
The 1987 changes to the individual income tax occurred in three major areas: federal conformity and simplification; 1986 federal tax reform; and rate structure.
In 1987 the starting point for computation of the Minnesota income tax was changed from federal adjusted gross income to federal taxable income. The Minnesota standard deduction and personal credits were replaced with the federal standard deduction and personal exemptions. Some of the adjustments to income were repealed. Using federal taxable income continued the trend toward closer conformity to federal itemized deductions.
Minnesota also adopted nearly all of the major changes contained in the federal Tax Reform Act of 1986. The changes broadened the tax base by, among other things, repealing the 60% capital gains exclusion and the dividend exclusion.
Both the number of tax brackets and the range of tax rates were reduced dramatically in 1987. Prior to 1985 there were twelve tax rates, from 1.6% to 16%. From 1988 to 2012 there were three tax rates. The rates were reduced in 1999 and in 2000 and were 5.35%, 7.05%, and 7.85% from 2000 to 2012. In 2013 a fourth bracket was added with a tax rate of 9.85%.
Individual Income Tax Introduction
Tax Base
In order to be a tax expenditure, a provision must be included in the defined tax base for that tax. For this study, the tax base for the individual income tax is defined as income from all sources less expenses that are reasonable and necessary to generate that income. If an expense is reasonable and necessary to generate income, it is not considered a tax expenditure.
An all-encompassing definition of income would include gifts and bequests. For purposes of this study, gifts and bequests that are voluntary and unconditional are not considered income, and, therefore, their exclusion is not considered a tax expenditure. Payments to which the recipient is entitled due to meeting specified requirements, such as social security, workers compensation, and public assistance, are considered income. Therefore, the exclusions of income from these sources are tax expenditures.
Computation of the Tax
The computation of the Minnesota individual income tax starts with federal taxable income. The definition of federal taxable income in Minnesota tax law references the Internal Revenue Code as of a specified date. If federal legislation is enacted which affects the computation of federal taxable income, a state law change is required to adopt the federal change. At the time of this report, Minnesota law references the Internal Revenue Code as amended through April 14, 2011, for tax years 2013 and after. Because Minnesota has not generally adopted the federal changes made after that date, several tax expenditure provisions no longer apply to Minnesota and are not included in this report.
Minnesota has adopted the federal personal exemptions, the federal standard deduction, and the federal itemized deductions, but state income taxes (and sales taxes, when applicable) are added back on the Minnesota return. The tax expenditure estimates for the itemized deductions take into account the incremental benefit of the deduction over the standard deduction for those taxpayers who would lose the benefit of itemizing by the loss of that one deduction.
The tax brackets are increased annually by the increase in the United States Consumer Price Index and for tax year 2014 are as follows:
5.35% 7.05% 7.85% 9.85%
Married Joint $1 - $36,080 $36,081 - $143,350 $143,351 - $254,240 Over $254,240
Married Separate $1 - $18,040 $18,041 - $71,680 $71,681 - $127,120 Over $127,120
Single $1 - $24,680 $24,681 - $81,080 $81,081 - $152,540 Over $152,540
Head of Household $1 - $30,390 $30,391 - $122,110 $122,111 - $203,390 Over $203,390
An alternative minimum tax (AMT) on tax preference items is imposed to the extent that it exceeds the regular tax computed from the above rate schedule. The Minnesota AMT is similar to the federal AMT and is 6.75% of Minnesota alternative minimum taxable income. The benefits to a taxpayer of a number of the deductions shown as tax expenditures are lower because part or all of these items must be added back in computing alternative minimum taxable income.
Individual Income Tax Introduction The tax expenditures are shown in this report generally in the order in which they occur in the computation of the tax. The Minnesota individual income tax is computed as follows for tax year 2014:
Income from all sources minus: federal exclusions equals: federal gross income minus: federal deductions
equals: federal adjusted gross income
minus: federal standard deduction or itemized deductions minus: federal personal exemptions
equals: federal taxable income
plus: Minnesota additions
minus: Minnesota subtractions equals: Minnesota taxable income
times: graduated rates of 5.35%, 7.05%, 7.85%, and 9.85%
equals: gross tax
plus: alternative minimum tax at 6.75% rate
plus: tax on lump sum distribution from a pension plan
minus: nonrefundable credits equals: income tax liability minus: refundable credits
Individual Income Tax Federal Exclusions
FEDERAL EXCLUSIONS
1.01 EMPLOYER-PROVIDED MEALS AND LODGING
Internal Revenue Code, Sections 119 and 132(e)(2) Minnesota Statutes, Section 290.01, Subd. 19
Section 119 of the Internal Revenue Code allows an employee to exclude from income the value of meals and lodging furnished by the employer for the employer’s convenience on the business premises. For lodging to qualify, it must be required as a condition of employment, such as for a live-in housekeeper or an apartment resident manager. This provision does not cover instances in which an employee is reimbursed by the employer for amounts spent on meals and lodging. An exclusion from income also applies to the fair market value of meals provided to employees at a subsidized eating facility operated by the employer. The facility must be located on or near the employer’s business, and revenue from the facility must equal or exceed the facility’s direct operating costs.
These exclusions were first allowed in 1918 by federal regulation. Section 119 was enacted in 1954. The exclusion of meals at employer-provided facilities was enacted in 1984. These provisions were last changed in 1998.
Fiscal Year Impact
2014 2015 . 2016 2017
State General Fund $14,800,000 $16,400,000 $17,900,000 $19,500,000
1.02 HOUSING ALLOWANCES FOR MINISTERS
Internal Revenue Code, Section 107
Minnesota Statutes, Section 290.01, Subd. 19
Section 107 of the Internal Revenue Code provides that the gross income of a minister of the gospel does not include any housing allowance that is part of compensation. The exclusion applies whether it is the rental value of a home furnished to the minister or a cash housing allowance paid as part of compensation. The amount of the cash housing allowance excluded cannot exceed the fair rental value of the home. A minister who owns a home and receives a cash housing allowance may also claim itemized deductions for mortgage interest and real estate taxes. This exclusion was enacted federally in 1921 and adopted by Minnesota in 1945. The provision was last changed in 2002.
Fiscal Year Impact
2014 2015 . 2016 2017
Individual Income Tax Federal Exclusions 1.03 EMPLOYER-PROVIDED DEPENDENT CARE ASSISTANCE
Internal Revenue Code, Section 129
Minnesota Statutes, Section 290.01, Subd. 19
Employer-provided dependent care assistance is excluded from the employee’s income if the assistance is provided through a formal, written plan. The amount excluded from an employee’s income cannot exceed $5,000 during a tax year. The assistance provided may not discriminate in favor of highly-compensated employees, shareholders, or owners. The amount excluded cannot exceed the employee’s earned income; amounts exceeding earned income are taxable.
If the taxpayer makes direct payments for child or dependent care, this exclusion does not apply, but the taxpayer may be eligible for the child and dependent care credit (Item 1.84).
This provision was enacted in 1981 and was last changed in 1996.
Fiscal Year Impact
2014 2015 . 2016 2017
State General Fund $12,600,000 $13,400,000 $14,300,000 $15,400,000
1.04 EMPLOYEE AWARDS
Internal Revenue Code, Sections 74(c) and 274(j) Minnesota Statutes, Section 290.01, Subd. 19
Certain employee awards are excluded from gross income. To qualify, the award must be tangible personal property and must be given for either length of service or safety achievement. The business deduction allowed to the employer determines the size of the award that is excluded. In general, the exclusion is limited to $400. If the employer has an established written plan which does not discriminate in favor of highly-compensated employees, the exclusion for each employee may be up to $1,600.
Employee awards were first specifically excluded by statute in the federal Tax Reform Act of 1986.
Fiscal Year Impact
2014 2015 . 2016 2017
Individual Income Tax Federal Exclusions
1.05 EMPLOYER PENSION PLANS
Internal Revenue Code, Sections 401-407, 411, 415, and 457 Minnesota Statutes, Section 290.01, Subd. 19
Contributions by an employer to an employee’s qualified pension plan are excluded from the employee’s income. The current-year earnings derived from such contributions, as well as those from contributions made by the employee, are also excluded. The employee’s contribution is also excluded from income for specific types of plans, including 401(k) plans, certain government plans, tax-sheltered annuities, and deferred compensation.
The tax expenditure is actually a deferral of income and not an exclusion because pension income which was not previously taxed must be included in income when disbursements are received. The estimates show the fiscal impact of excluding current-year pension contributions and earnings from taxable income, net of all taxable pension income disbursed in that year.
The federal exclusion was enacted in 1921, and the Minnesota exclusion was enacted in 1933. Various changes were enacted over the years, primarily affecting the requirements for a qualified plan. The last changes were made in 2012.
Fiscal Year Impact
2014 2015 . 2016 2017
State General Fund $653,500,000 $725,300,000 $822,200,000 $900,000,000
1.06 CONTRIBUTIONS BY EMPLOYERS FOR MEDICAL INSURANCE PREMIUMS AND MEDICAL CARE
Internal Revenue Code, Sections 105 and 106 Minnesota Statutes, Section 290.01, Subd. 19
All employer contributions to health insurance plans which provide compensation for sickness and injury are excluded from the employee’s income. Payments from such plans may be excluded to the extent that they are based on the nature of the injury or illness or the cost of medical care and are not based on the period the employee is absent from work.
Employer contributions for medical insurance premiums and medical care have never been subject to taxation. In 1996 the provisions were extended to include long-term care insurance.
Fiscal Year Impact
2014 2015 . 2016 2017
Individual Income Tax Federal Exclusions 1.07 EMPLOYER-PAID ACCIDENT AND DISABILITY PREMIUMS
Internal Revenue Code, Sections 105 and 106 Minnesota Statutes, Section 290.01, Subd. 19
Premiums paid by an employer to an employee accident and disability insurance plan are excluded from the gross income of the employee.
This provision was enacted in 1954.
Fiscal Year Impact
2014 2015 . 2016 2017
State General Fund $29,600,000 $31,200,000 $32,000,000 $33,500,000
1.08 EMPLOYER-PAID GROUP TERM LIFE INSURANCE PREMIUMS
Internal Revenue Code, Section 79
Minnesota Statutes, Section 290.01, Subd. 19
Group term life insurance premiums paid by an employer on behalf of an employee may be excluded from the employee’s income. However, this exclusion applies only to premiums paid for insurance coverage of $50,000 or less; premiums for coverage in excess of $50,000 must be included in an employee’s gross income. In order for the premiums to qualify for the exclusion, the plan must meet certain requirements including nondiscrimination rules.
In 1920 a federal administrative legal opinion was issued authorizing this exclusion. In 1954, when the Internal Revenue Code was revised, the provision was codified as Section 79 and was last changed in 1996.
Fiscal Year Impact
2014 2015 . 2016 2017
Individual Income Tax Federal Exclusions
1.09 EMPLOYER-PAID TRANSPORTATION BENEFITS
Internal Revenue Code, Section 132(f) Minnesota Statutes, Section 290.01, Subd. 19
Certain employer-provided transportation benefits are excluded from the employee’s income. The exclusion applies to transit passes, parking, and transportation in a commuter vehicle between the employee’s residence and place of employment. The maximum federal exclusion from an employee’s income is $245 per month in 2013. The 2013 exclusion for the Minnesota tax is limited to $245 per month for parking and $125 per month for transit passes and transportation in a commuter vehicle. The maximum amounts are adjusted annually for inflation. These benefits were first excluded by statute in 1984. The provision was last changed in 2013 when the maximum exclusion for parking also applied to transit passes and commuter vehicles for 2013. Minnesota did not adopt the federal change.
Fiscal Year Impact
2014 2015 . 2016 2017
State General Fund $41,300,000 $44,400,000 $48,300,000 $52,200,000
1.10 CAFETERIA PLANS
Internal Revenue Code, Section 125
Minnesota Statutes, Section 290.01, Subd. 19
Section 125 of the Internal Revenue Code allows an employee to choose to receive a combination of nontaxable fringe benefits or receive all or part of the value of the fringe benefits as taxable compensation. The value of a combination of fringe benefits chosen by the employee is excluded from federal gross income. The nontaxable benefits that may be offered by a plan include the following: group term life insurance; accident or health benefits; dependent care assistance; transportation benefits; and 401(k), profit sharing, or stock bonus plans. If the plan discriminates in favor of highly-compensated or key employees, all benefits paid to those particular employees are taxable.
This exclusion was enacted in 1974 and was first allowed in 1978. It was last changed in 1998. Fiscal Year Impact
2014 2015 . 2016 2017
Individual Income Tax Federal Exclusions 1.11 EMPLOYER-PROVIDED TUITION REDUCTION
Internal Revenue Code, Section 117(d) Minnesota Statutes, Section 290.01, Subd. 19
A reduction in tuition allowed to an employee of an educational institution is excluded from income if it is not a payment for services. The exclusion also applies to a tuition reduction allowed for the spouse and dependent children of an employee.
This exclusion was enacted in 1984.
Fiscal Year Impact
2014 2015 . 2016 2017
State General Fund $1,700,000 $1,900,000 $2,100,000 $2,300,000
1.12 MISCELLANEOUS EMPLOYEE FRINGE BENEFITS
Internal Revenue Code, Sections 117(d) and 132 Minnesota Statutes, Section 290.01, Subd. 19
In addition to Items 1.01 through 1.11, certain other employee benefits may be excluded from income. The benefits include employee discounts, services provided at no additional cost, and de
minimis fringe benefits. The benefits may also be for the employee’s spouse or dependent.
The status of employee benefits not specifically exempted by statute was uncertain prior to the enactment of Section 132 of the Internal Revenue Code in 1984. Any benefit not specified as exempt by the Internal Revenue Code is now considered taxable compensation. This provision was last changed in 1997.
Fiscal Year Impact
2014 2015 . 2016 2017
Individual Income Tax Federal Exclusions
1.13 INCOME EARNED ABROAD BY U.S. CITIZENS AND FOREIGN HOUSING COSTS
Internal Revenue Code, Section 911
Minnesota Statutes, Section 290.01, Subd. 7 and 19
A United States citizen or resident whose principal residence is in a foreign country and who is either present overseas for eleven out of twelve consecutive months or is a bona fide resident of a foreign country may exclude the income earned in a foreign country up to a maximum of $80,000. A separate exclusion applies to federal employees (Item 1.14).
The taxpayer may also exclude any employer-paid foreign housing costs above a floor amount equal to 16% of step 1 salary at the GS-14 level. A deduction of an equal amount is allowed if the foreign housing costs are paid by the taxpayer. The combined income and housing exclusion or deduction may not exceed the taxpayer’s total foreign earned income for that year.
Individuals qualifying under these provisions may be considered nonresidents for Minnesota tax purposes under certain conditions.
Income earned abroad by United States citizens was excluded without limitation from federal gross income in 1926. The deduction for foreign housing costs was enacted in 1979. A $70,000 maximum exclusion was enacted in 1986. In 1997 the maximum exclusion was increased to $72,000 for 1998 and increased by $2,000 per year to $80,000 in 2002 and thereafter.
Fiscal Year Impact
2014 2015 . 2016 2017
State General Fund $42,400,000 $50,200,000 $58,700,000 $65,100,000
1.14 CERTAIN ALLOWANCES FOR FEDERAL EMPLOYEES ABROAD
Internal Revenue Code, Section 912
Minnesota Statutes, Section 290.01, Subd. 19
United States federal civilian employees who work abroad are allowed to exclude from income certain allowances that are generally linked to the cost of living. Federal employees are not eligible for the Section 911 exclusion (Item 1.13). The allowances eligible for exclusion include housing, education, and travel, and they are defined by reference to specific federal legislation, including the Foreign Service Act of 1980, the Central Intelligence Act of 1949, the Overseas Differentials and Allowances Act, and the Administrative Expenses Act of 1946. Also excluded are cost-of-living allowances received by federal employees stationed in U.S. possessions, Hawaii, and Alaska, and certain allowances received by members of the Peace Corps.
The federal exclusion was enacted in 1943 and was last amended in 1988. Fiscal Year Impact
2014 2015 . 2016 2017
Individual Income Tax Federal Exclusions 1.15 BENEFITS AND ALLOWANCES TO ARMED FORCES PERSONNEL
Internal Revenue Code, Sections 112 and 134 Minnesota Statutes, Section 290.01, Subd. 19
Section 112 of the Internal Revenue Code excludes compensation received by military personnel for active service in a designated combat zone. No dollar limit applies to the exclusion for enlisted personnel, but the limit for commissioned officers is equal to the highest rate of basic pay at the highest pay grade applicable to enlisted personnel.
Under Section 134 of the Internal Revenue Code, the value of in-kind benefits provided to military personnel and the cash payments given in lieu of the benefits are excluded from gross income. These benefits include allowances for housing and overseas cost of living, medical and dental benefits, group term life insurance, professional education, and dependent education. The exclusion of benefits and allowances to Armed Forces personnel was allowed in 1925. The exclusion of meals, housing, and cash allowances was codified 1986. These provisions were last changed in 2003.
Fiscal Year Impact
2014 2015 . 2016 2017
State General Fund $25,700,000 $27,900,000 $30,100,000 $31,400,000
1.16 MEDICAL CARE AND TRICARE MEDICAL INSURANCE FOR MILITARY DEPENDENTS AND RETIREES
Internal Revenue Code, Section 134
Minnesota Statutes, Section 290.01, Subd. 19
Dependents of active-duty military personnel, retired military personnel and their dependents, and survivors of deceased members are eligible for medical and dental care similar to active-duty military personnel. The care may be provided in military facilities from military doctors or by civilian health-care providers working under contract with the Department of Defense in the TriCare Program. Medical benefits and medical insurance provided to eligible participants are